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In This Issue...

High Quality Preferred Stocks

Preferred Stock News

Special Announcement

Preferred Stock Facts

FREE Special Offer


For New Readers...

Welcome to all of the new CDx3 Newsletter readers who signed up over the last month. This is your first issue of the CDx3 Newsletter, a free monthly newsletter devoted to the interests of CDx3 Preferred Stock investors.

To be sure that you continue to receive the CDx3 Newsletter each month, please remember to add the following email address to your email address book safe sender list:


What Is A "CDx3 Preferred Stock?"

CDx3 Preferred Stocks are regular preferred stocks that are able to meet the ten selection criteria described in chapter 7 of my book, Preferred Stock Investing.

Applying the CDx3 Selection Criteria eliminates the pretenders, leaving just the highest quality issues.

For example, here are three of the ten CDx3 Selection Criteria:

1. be issued by a company with a perfect record of never having suspended a dividend on a preferred stock;

2. have the "cumulative" dividend requirement, which means that in the unlikely event that the issuing company misses a dividend payment to you, they have to make it up to you later; they still owe you the money; and

3. be rated "investment grade" by Moody's Investors Service.

Having specific and consistently applied selection criteria takes the emotion out of your investing decisions and leaves you with the highest quality preferred stocks - "CDx3 Preferred Stocks."


Quick Summary

This month's High Quality Preferred Stocks article describes how preferred stock investors can use today's high market prices to increase their dividend income while producing a net capital gain at the same time. The article identifies 18 high quality preferred stocks to show how you can 'upgrade' your preferred stock portfolio. (jump to article)

The Preferred Stock News article presents two charts showing the extent to which the Federal Reserve's Operation Twist has impacted the yields offered by high quality preferred stocks. Are today's high prices a temporary spike or a "new normal?" The article goes on to identify four key events that have created today's high market prices and explains how events in Europe will determine where prices are headed next. (jump to article)

The Special Announcement article explains how you can now have continuing preferred stock research delivered to you for free. Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. (jump to article)

The Preferred Stock Facts article is presented both here and on the Preferred Stock Investing Reader's Forum. Test your knowledge by clicking on any preferred stock question to see the multiple-choice answers. You will receive an automatic email that provides you with the correct answer and my explanation. (jump to article)

In the Free Special Offer article I offer to provide you with some of the research from my book, Preferred Stock  Investing, Fourth Edition. I am making it available to brokers, financial planners and investment groups for free. (jump to article)

Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.

Doug K. Le Du

I am a preferred stock researcher and author of the book titled Preferred Stock Investing. I also publish two monthly newsletters that describe my ongoing preferred stock research. My academic background is in economics and statistics. I retired from my position as Managing Director at one of the world's largest management consulting firms in 2002 to focus on preferred stock research. I do not sell preferred stocks nor am I a stock broker or financial adviser. As a researcher, I research the market price behavior of the highest quality preferred stocks and write to you about my observations.



18 High Quality Preferred Stocks Allow You To Upgrade Your Portfolio

'Upgrade' Technique Increases Dividend Income With Cash Left Over

Just because market prices for high quality preferred stocks are at a record high does not mean that buyers have to sit on the sidelines. During "buyer's market" conditions (lower prices), being a preferred stock investor is easy - buy shares below par, cash the dividend checks and wait for the issuing company to redeem your shares for a capital gain.

During "seller's market" conditions, however, there are no shares priced below par, so using the same technique is not going to be very productive.

There are three techniques that preferred stock investors can use during a seller's market to take advantage of the high prices to generate additional income - the Double-Dip, Upgrading and Piling On.

Last month's issue of the CDx3 Newsletter described the Double-Dip technique (which is used when a preferred stock is called by its issuing company) so this month we'll discuss "Upgrading." The objective of Upgrading is to sell a preferred stock that you currently own and use the proceeds to buy another such that (a) your dividend income goes up and (b) you realize a net capital gain with cash left over when you're done.

Upgrading is a two-step process. In the example presented here you will go from making 6.9% per year in dividend income to 7.125% and have a net capital gain of $1.77 per share in left over cash in your brokerage cash account when you're done. The data presented here is from actual preferred stocks using market prices from August 2, 2012.

Please note that in order to protect the values of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) the actual trading symbols are obscured here. If you are already a subscriber to the CDx3 Notification Service the trading symbols used here have been posted on the CDx3 Discussion Group forum under the topic titled "August 2012 CDx3 Newsletter Trading Symbols."

Step 1: Sell Candidate - Low Payer Selling For A High Price

Look over your preferred stock portfolio and find an issue with a relatively low coupon rate but a high market price (higher than your original purchase price). In today's record-setting seller's market, you will not have any trouble finding one. Figure 1 shows the sell candidate for this example; you will be selling "PFD-A" for a market price of $28.70.

PFD-A pays an annual dividend of 6.9% which generates $0.43 per quarter in dividend income for you. PFD-A has a call date of August 30, 2015 so it has 12 dividends left to pay before it becomes callable. If you hold onto your shares of PFD-A you will earn $5.16 in dividend income over the next 12 quarters.

By selling PFD-A for this upgrade, you realize a nice $3.70 per share capital gain (assuming that you originally paid $25.00 per share).

Step 2: Buy Candidate - Higher Payer Selling For A Lower Price

To find your buy candidate you need a list of preferred stocks that provide a higher dividend rate but at a lower current market price than your sell candidate from step 1. So you are looking for a preferred stock with a dividend rate (coupon) higher than 6.9% that is available for a market price less than $28.70 (per PFD-A from step 1).

The CDx3 Notification Service website provides subscribers with a database tool called "Preferred Stock List(TM)" that allows subscribers to identify buy candidates when performing an upgrade. For this example, I have limited the list of buy candidates to just the highest quality preferred stocks that (a) are call protected (i.e. are not yet callable by their issuing companies), (b) are not bank-issued trust preferred stocks (TRUPS) since those are subject to a call under new banking regulations at any time and (c) do not have a pending call.

Figure 2, generated by our Preferred Stock List(TM) database, shows the resulting 18 buy candidates to pick from.

This list is sorted by the current market price. There are several nice candidates here, but PFD-B is call protected until January 15, 2017 so that's our buy candidate for this upgrade. Offering a 7.125% annual dividend, shares of PFD-B generate $0.45 per quarter in dividend income.

Preferred stock investors should avoid purchasing shares for a market price above the security's par value ($25 per share in this case) since, in the event that the issuing company redeems your shares, you will receive the par value in cash. Paying more than par therefore exposes the investor to a capital loss in the event of a future call.

But remember, when performing an upgrade you have already been reimbursed for that potential downstream capital loss since you realized a capital gain when you sold your sell candidate shares at step 1. It is the fact that we are in a strong seller's market that allows this upgrading technique to work accordingly.

Result of "Upgrading"

Figure 3 presents the result of this upgrade. Remember, if you had not done this upgrade and just held onto your PFD-A shares for its remaining 12 quarters you would have earned a total income of $5.16 (all of it as dividend income) by the time PFD-A reaches its August 30, 2015 call date.

Over the same 12 quarters, upgrading PFD-A to PFD-B generates dividend income of $5.34 per share. That's an increase in your income of $0.18 per share over the next 12 quarters. Holding PFD-B until its January 15, 2017 call date (six more quarters) generates another $2.67 per share for a total dividend income of $8.01 ($5.34 plus $2.67).

Notice in Figure 3 how the $3.70 per share capital gain realized from selling PFD-A more than offsets the $1.93 capital loss in the event that PFD-B is called downstream by its issuing company. While purchasing PFD-B for $26.93 exposes you to a potential $1.93 per share capital loss in the event of a future call, you were reimbursed for that loss in advance when you sold your PFD-A shares at step 1.

This upgrade not only increases the dividend return of your portfolio to 7.125% from 6.9% but you will have a net capital gain of $1.77 per share ($3.70 minus $1.93) sitting in your brokerage cash account.

Upgrading takes advantage of market price inefficiencies during a seller's market for high quality preferred stocks. Armed with a list of high quality preferred stocks sorted by market price, today's preferred stock investors are able to trade in shares of a low-payer for shares of a higher-payer to increase their dividend income and have cash left over.

Please consider becoming a subscriber to the CDx3 Notification Service today.

Already a subscriber? The trading symbols for this example are listed in the CDx3 Discussion Group topic titled "August 2012 CDx3 Newsletter Trading Symbols".


Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks

Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. The Fourth Edition is now available at your favorite online retailer. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock database and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.

Invest in the best. Subscribe to the CDx3 Notification Service today.





















Figure 1

PFD-A, Our Sell Candidate

Low Payer, High Price

(August 2, 2012 price shown)


Source: Preferred Stock List(TM), CDx3Investor.com










Figure 2

PFD-B, Our Buy Candidate

Higher Payer, Lower Price

(August 2, 2012 price shown)


Source: Preferred Stock List(TM), CDx3Investor.com


Subscribe For Trading Symbols


(Already a subscriber? For actual symbol see the CDx3 Discussion Group topic titled "August 2012 CDx3 Newsletter Trading Symbols").





Figure 3

Results of "Upgrading"

Increased Dividend Income With A Net Capital Gain

(values of per share)








Preferred Stock Prices: Temporary Spike Or A New Normal?

European Investors Have Overwhelmed the Fed's Operation Twist

Today's high preferred stock prices and corresponding lower yields are likely to be a temporary spike more so than a "new normal" going forward[1].

The average market price for high quality[2] preferred stocks started this year at $25.32 per share and closed July at $26.00 - a full dollar above their $25 par value. While there is no way to determine in advance what future prices will do, there is a case to be made that today's high prices will probably come to an end sooner rather than later (months not years).

In fact, as discussed here, it is the short-term behavior of European investors, much more so than our Federal Reserve's monetary policy or any other factor, that will likely lead to lower preferred stock prices in the U.S.

No New Normal

It is tempting to think that today's high preferred stock prices are a direct result of the Federal Reserve's "Operation Twist" monetary policy, phase 1 of which ran from last October through June of this year (followed immediately by phase 2, now underway).

The objective of Operation Twist is to push down long-term interest rates by reducing the yield provided by long-term (six year to 30 year maturity) treasuries.

Under Operation Twist, the Fed has been selling shorter-term treasuries (with maturities of three years or less) and using the proceeds to purchase longer-term issues. By purchasing longer-term treasuries, the Fed is effectively reducing the supply available to other global investors, hence raising prices. Increasing prices, in turn, lowers yield thereby achieving the desired policy objective of lowering the longer-term cost of money in the economy.

The result is a flattening of the "yield curve" as illustrated here for September 2011 (before the launch of Operation Twist) and June 2012 (the last month of phase 1). The notion that Operation Twist would pull down the yield of preferred stocks has a certain amount of intuitive appeal, the tide affecting all boats the same way.

Let's take a look.

This second chart shows the average monthly yield of high quality preferred stocks over the same period. Notice that while the overall result is a decrease, in five of the nine months since Operation Twist was launched last October, the yield provided by high quality preferred stocks was either flat or went up, not down.

The implication here is that while the Fed's Operation Twist probably does put upward pressure on preferred stock market prices (lowering yields), it is not clear from these data that today's extremely high prices are being caused by this policy.

Temporary Spike

The marketplace for preferred stocks is subject to the same laws of supply and demand as any other item that finds itself in a competitive market of buyers and sellers. As supply increases, giving buyers more choices, prices tend to drop.

We last saw this in dramatic fashion during 2008 when banks were continually introducing massive new preferred stock issues into the market. During the crisis all of our Big Banks - Citigroup, Bank of America, Wells Fargo, JP Morgan, Morgan Stanley - introduced multiple issues. Not to be outdone, our regional institutions got into the act as well with new issues from PNC Financial, BB&T, Fifth Third and others.

While there were a multitude of risk-related issues for investors to deal with at the time, the market was flooded with new shares and prices dropped accordingly (all the way to an average of $16.14 per share at the end of October 2008).

Now consider this about today's preferred stock market: at this point last year the companies that issue preferred stocks had treated us to $5.7 billion in new issues to consider. So far this year, the supply of new preferred stocks available for preferred stock investors to pick from is at a whopping $17.1 billion[3].

But despite this tripling of supply, prices have not fallen; rather, they have climbed to an all-time high.

It appears that excess demand is causing today's high prices, much more so than the Fed's Operation Twist.

Four Key Events

So how long will these high preferred stock prices last? As mentioned earlier, it is impossible to know for sure. But once we understand what is causing the current spike in demand, that question becomes easier to answer.

While there are always a multitude of forces exerting pressure on market prices at all times, four key events, occurring nearly simultaneously, are significant contributors to the current spike in preferred stock market prices.

1. Several months ago investors were very worried that the Fed was going to have to start increasing rates in order to hold off inflation. Such a rate increase could put downward pressure on preferred stock market prices so the more nervous among us were staying away from fixed-income securities. That fear has subsided substantially, bringing such investors back in as buyers.

2. The yields on the alternatives that many fixed-income investors favor (bank Certificates of Deposit and investment grade corporate bonds) are paying 1.1% and 3.6%, respectively. Since these earnings are completely wiped out by taxes and inflation, many have turned to the next step up the risk ladder - high quality exchange traded debt securities and high quality preferreds.

3. The June 7 announcement by the Fed regarding Basel III compliance opened the 90-day premature call window, triggering redemption announcements for bank-issued trust preferred stocks (TRUPS). Tens of billions of cash started flowing into the cash accounts of preferred stock investors starting with shareholders of STI-Z from SunTrust on Wednesday, July 11, 2012.

4. Eurozone investors are fleeing European assets and moving their funds to US fixed-income assets, especially investment grade preferreds and corporate bonds. In March, for example, net buying of U.S. financial assets including long-term equities, notes and bonds totaled $36.2 billion, up from $10.1 billion the month before[4].

If we can accept that today's high prices have been caused primarily by a spike in demand due mostly to these key events (more so than by the Fed's Operation Twist policy), then it follows that the upward pressure will ease as these events run their course.

In fact, some might even argue that preferred stock prices have already peaked. After having risen from $25.32 to start the year, the average high quality preferred stock market price at the end of July was $26.00 per share, down $0.01 from June.

Further, three of the four key events identified above have probably already played out.

Investors who fled fixed-income securities for fear of inflation's eroding effects have already returned. Whatever upward pressure this returning group's demand exerted on preferred stock market prices has likely already happened.

Bank CD rates and investment grade corporate bond rates leveled off at 1.1% and 3.6%, respectively, earlier in the year. Like those who had fled preferreds due to inflation fears but have since returned, most savers and bond investors who were considering jumping to high quality preferreds have likely already done so.

Redemptions of bank-issued TRUPS are just about to run their course as well. The call window opened by the Fed's June 7 announcement will close on September 7, 2012. Prior to the July 2010 signature of the Wall Street Reform Act there were over 30 high quality TRUPS trading on US stock exchanges; today there are only nine left[5], six of which have already exceeded their respective call dates and can be redeemed at any time. With the exception of a few holdouts, the majority of bank-issued TRUPS redemptions in response to new domestic and international regulations have already happened. While the Fed's June 7 announcement has pushed many of the remaining TRUPS shareholders into the market as buyers looking to replace their called TRUPS shares, that wave is just about spent.

That leaves us with Europe.

Europe Holds The Trigger For Lower Prices

European officials do not have to solve the eurozone problems before investors will return to European assets; they simply have to appear as if they are intent on doing so and are starting to take credible steps accordingly.

We have seen this on many occasions over the last couple of years, triggered by a single positive headline. With eurozone asset yields sky high, investors will jump back to those assets, seeking to beat the returning crowd, given the slightest indication that it may be time to do so. If European leaders continue to work through these issues and show progress, investors will return as quickly as they fled which could happen at any time.

The increase in demand from those getting over their inflation fears and those fleeing bank CDs and corporate bonds is likely to have already happened. And the newly cash-rich buyers who are seeking to replace their called TRUPS shares will wash through the system shortly.

For today's excess demand for U.S. preferred stocks to subside, former European asset investors who have currently parked their cash in U.S. preferred stocks have to see sufficient reason to return to eurozone investing. Probably more so than any other single factor, this is the event that will relieve the excess demand and high prices that we are currently seeing in the marketplace for high quality preferred stocks.

For preferred stock investors looking for ways to take advantage of today's high prices, the High  Quality Preferred Stocks article above describes a technique that can allow you to do so while the opportunity exists.

[1] Source for all preferred stock data in this article:
CDx3 Notification Service database, Preferred Stock Investing, Fourth Edition. Disclaimer: The CDx3 Notification Service is my preferred stock email alert and research newsletter service including data for all preferred stocks and Exchange Traded Debt Securities traded on U.S. stock exchanges.

[2] "High quality" preferred stocks are those that meet the ten risk-lowering selection criteria from chapter 7 of my book, Preferred Stock Investing. For example, high quality preferred stocks have investment grade ratings and the cumulative dividend requirement.

[3] Source: 4-Traders.com (a Dow Jones Company), July 24, 2012, "GE Capital, BB&T Issue Preferreds as Yield Hunt Lowers Capital Costs" by Katy Burne.

[4] Source: Bloomberg research.

[5] There are actually thirteen high quality TRUPS still trading on U.S. stock exchanges but four have calls pending and have been excluded here.











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More Preferred Stock Research From

Doug K. Le Du

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Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month.

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Test Your Knowledge With These Preferred Stock Facts!

There's a lot to like about preferred stocks. And many aspects of selecting, buying and selling the highest quality issues are misunderstood. Here are a few frequently asked questions that illustrate some of the more subtle points of preferred stock investing.

Clicking on any of the below questions will open a new window on your screen. Each question is presented with multiple-choice answers. Test your knowledge by submitting your best guess and I will automatically email you my analysis with the correct answer (and no spam, ever).















Brokers And Investment Groups: Free Meeting Materials Now Available

As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service.

My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing.

The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing.

The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts:

Part 1: Approach and Objectives To Preferred Stock Investing

Part 2: How and When To Buy and Sell Preferred Stocks

Part 3: Preferred Stock Investing Resources

To request the Preferred Stock Investing Group Materials just send an email request to:


You will receive an auto-reply email message with current download instructions.




Learn to screen, buy and sell the highest quality preferred stocks by purchasing the Fourth Edition of my  book, Preferred Stock Investing (see retailers). The book identifies the resources that you need to be a very successful CDx3 Investor completely on your own. If you would rather we do the research and calculations for you I offer the CDx3 Notification Service (see reader comments).

Chapter 15 of Preferred Stock Investing includes a list of all of the CDx3 Preferred Stocks issued since January 2001 and the investing results you would have achieved had you invested in them using the CDx3 Income Engine.

And readers also receive free periodic updates to the preferred stock lists in chapter 15 as long as the Fourth Edition of the book is in print.

Please take a look at www.PreferredStockInvesting.com. And if you know someone who might be interested in simple investing for non-experts please have them send an email message to:


and they will automatically begin receiving this monthly CDx3 Newsletter next month (plus a CDx3 Special Report) - all FREE. 

Many Happy Returns,

Doug K. Le Du




Copyright (c) 2012 by Doug K. Le Du

Preferred Stock List, CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du.  All rights reserved.

Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies.

DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.